Lee Leaves Legacy of Growth as Singapore Confronts Aging Threat

Lee Kuan Yew inherited a thriving port and a young and underemployed workforce, ingredients that helped forge Southeast Asia’s only developed nation by luring factories and boosting exports. His son got an aging workforce with some of the highest wages in the region and the task of finding a new model for Singapore.

Lee, the country’s first premier who died March 23 at 91, opened Singapore to foreign investment while running a tightly-controlled state that emphasized incorruptibility and stability. The recipe helped produce Southeast Asia’s biggest bank, one of the most globally recognized airlines, and a city that ranks among the world’s most expensive.

That success has bred new challenges for Lee’s son Lee Hsien Loong, prime minister since 2004. In its 50th year of independence, the country’s median age has reached 39.3, about double what it was when Lee Kuan Yew became leader. Singapore is now recalibrating its economic model amid voter complaints about insufficient welfare spending for the elderly, overcrowding, competition for jobs and higher home prices.

“The pursuit of top-line GDP growth might have been the best thing to do in the 80s, maybe, but this is 2015 and the biggest problem in Singapore today is economic injustice,” said Thum Ping Tjin, a research associate at the Centre for Global History at the University of Oxford. “It’s a pragmatic recognition that to win the next election they need to address the voters’ most pressing concerns.”

Healthcare Spending

Singapore’s government, led by the ruling party co-founded by the elder Lee, is starting to boost spending on health care, especially for older people. In the 2015 budget, the government said it will raise taxes for the country’s top earners to help bear the burden of higher expenditure, which includes changes to the national pension system to benefit older and middle-income workers.

Smaller than New York City and with limited natural resources, Singapore’s growth since independence in 1965 helped boost gross domestic product per capita to S$71,318 ($52,270) in 2014 from S$1,580, when the majority of its working population was in trade, processing and service activities.

The island that former economic adviser Albert Winsemius once said was considered a “poor little market in a dark corner of Asia” now has manufacturers accounting for almost a fifth of the economy and is one of the world’s largest foreign-exchange and wealth management centers.

“It is a most improbable story,” the elder Lee said at a National Day celebration in August 2010. “No one gave us any hope of survival. We defied the odds and got to where we are.”

Polyglot Population

Splitting with Malaysia in 1965, Singapore had an unemployment rate of about 10 percent among its polyglot population of 1.9 million. The jobless rate is now about 2 percent.

“The first duty of the government is to be able to feed its people in a little island,” Lee said in a National Geographic interview in 2009. “There’s no hinterland and no farming, you have got to trade and you have got to do something to get people to buy your goods or services or get people to come here and manufacture themselves, export.”

Within a decade of independence, the pullout of British troops would empty military bases which employed tens of thousands of Singaporeans and whose presence contributed to about a fifth of the economy. Lee sped up Singapore’s industrialization.

During a sabbatical in 1968, Lee went to Harvard University as an Institute of Politics fellow and “stumbled on” multinational companies that were searching for new production bases. He saw them as the solution to Singapore’s unemployment problem.

Conventional Wisdom

“We welcomed multinational companies to invest and manufacture in Singapore when the conventional wisdom was that MNCs exploit Third World countries,” he said in a speech in April 2009.

Lee’s government invested in export-based industries by building new container terminals for Singapore’s port, and reclaimed land offshore to attract companies such as Exxon Mobil Corp. and Royal Dutch Shell Plc for an oil refining complex. Incentives provided to overseas investors included tax holidays, while laws were put in place prohibiting strikes without warning.

“For Mr. Lee Kuan Yew, Singapore has been a lifelong preoccupation,” Education Minister Heng Swee Keat, who served as Lee’s principal private secretary from mid-1997 to early 2000, said in a Facebook post this week. “This decision to connect to the world enabled us to ride the waves of global growth since our independence.”

Business Hub

Singapore leapfrogged over its larger neighbors and improved the living standards of its people as Lee sold to investors an efficient, English-speaking labor force. The city has become a regional business hub, with financial and other services, including accounting and legal practices, now making up close to 40 percent of its services exports.

Singapore’s greater policy stability, economic development and openness in relation to its neighbors has helped turn the island’s dollar into a de facto safe haven currency for the region, luring investment and funds from the wealthy.

The Singapore dollar climbed as much as 23 percent against the U.S. dollar in the two years following the worst of the 2008-09 global financial crisis. Unlike many other central banks, Singapore’s uses the exchange rate instead of interest rates as a monetary policy tool.

“Singapore is what it is because of Mr Lee,” Finance Minister Tharman Shanmugaratnam said on Facebook March 23. “He built clean government, and a culture of telling it straight -- telling people the problems, and finding a way to fix them.”

Global Risks

To be sure, the island’s openness also leaves it vulnerable to global economic shifts. Growth in 2014 fell below 3 percent for the first time since 2009 as the world’s recovery faltered. The government is also preparing the nation for slower expansion, given the aging population and a shift away from cheap foreign labor curbing some industries.

Its sovereign wealth fund now manages more than $100 billion while Temasek Holdings Pte, the state-owned investment company, had S$223 billion of assets as of March 2014.

Lee maintained a hold on the economy by establishing state-owned enterprises in industries from shipbuilding to banking, property, communications and transportation. Temasek was set up in 1974 to foster the growth of government-linked companies, many of which were monopolies before globalization led to the liberalization of industries.

Government Presence

That government presence remains as the younger Lee puts his own print on the economy. He lifted a four-decade ban on casinos in 2005 to maintain competitiveness in a swelling Asian tourism market and China drew more manufacturing investment.

The current Prime Minister Lee has also sought to convince Singaporeans to wed younger and have more children, four decades after concern about overcrowding prompted Lee Kuan Yew to urge citizens to have smaller families.

The current administration has widened social safety nets, focused on boosting productivity and worked to narrow the income gap, said Irvin Seah, an economist at DBS Group Holdings Ltd. who used to work for the Ministry of Trade and Industry and was involved in a government-wide economic review in 2001.

“In terms of our fiscal policy, it’s shifting towards addressing more social needs and also preparing the country for an eventual aging of its population,” he said.

Singapore will raise its top marginal tax rate to 22 percent from 20 percent from 2017, while others among the top 5 percent of earners will also see a bigger bill. For the low-income elderly, the government is increasing support by giving them a payout every quarter to help with living expenses.

Pioneer Package

The nation’s elderly will triple to 900,000 by 2030, according to the National Population and Talent Division. The government in 2014 set aside funds in a so-called Pioneer Generation Package for about 450,000 Singaporeans who were at least aged 16 in 1965, the year Lee Kuan Yew cried on television as Singapore separated from Malaysia.

“What constrains them from truly embracing new challenges is their inability to let go of the past and a lot of that is because of the overwhelming legacy of Mr. Lee Kuan Yew,” said Oxford’s Thum Ping Tjin. “The lack of Lee Kuan Yew may actually, if they are wise, liberate them from a lot of historical baggage.”